South Korea Central Bank Warns Against State-backed Cryptocurrency

South Korea's central bank has warned that adopting a state-backed cryptocurrency will undermine the country's financial system, leading to liquidity shortage and high interest rates.

According to a report published by the Bank of Korea (BOK), the introduction of a central bank digital currency (CBDC) will replace demand deposits held by local commercial banks as investors will go after the BOK-backed CBDC thinking that it is far safer, Korea Times reported Thursday.

"The CBDC is a kind of a BOK-issued bank account. People trust it more than one in a commercial bank," Kwon Oh-ik, one of the co-authors of the report, said. "Demand deposits are one of the biggest sources of loans by banks. When people pull out their money, banks raise rates, or lower the reserve ratio, to secure more funds," he explained.

In a detailed study, the BoK researchers recently made it clear that it was against issuing a CBDC in the near future.

It said it would work further on benefits and costs of implementing Central bank-issued digital currency.

The Bank of International Settlements (BIS) had warned central banks that consider issuing CBDC to "carefully weigh" the implications of doing so.

However, IMF's Christine Lagarde is in support of central banks issuing digital currency.